Skillz Inc. - Quarter Report: 2022 March (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the quarterly period ended March 31, 2022
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the transition period from ______to______
Commission file number: 001-39243
SKILLZ INC.
(Exact name of registrant as specified in its charter)
Delaware | 84-4478274 | |||||||||||||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||||||||
PO Box 445 San Francisco, California | 94104 | |||||||||||||
(Address of Principal Executive Offices) | (Zip Code) | |||||||||||||
(415) 762-0511
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
| Class A common stock, par value $0.0001 per share | SKLZ | New York Stock Exchange | ||||||
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☒ | Accelerated filer | ☐ | ||||||||
Non-accelerated filer | ☐ | Smaller reporting company | ☐ | ||||||||
Emerging growth company | ☐ | ||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
As of May 2, 2022, the registrant had outstanding 340,808,740 shares of Class A common stock and 68,717,138 shares of Class B common stock.
SKILLZ INC.
TABLE OF CONTENTS
| Page | |||||
| Note Regarding Forward Looking Statements | |||||
PART I - FINANCIAL INFORMATION | |||||
Item 1. Financial Statements (Unaudited) | |||||
PART II - OTHER INFORMATION | |||||
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, about Skillz Inc. (“we,” “us,” “our,” or the “Company”) and our industry that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this report, including statements regarding guidance, our future results of operations or financial condition, business strategy and plans, user growth and engagement, product initiatives, and objectives of management for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements because they contain words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “going to,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “will,” or “would” or the negative of these words or other similar terms or expressions. We caution you that the foregoing may not include all of the forward-looking statements made in this report.
You should not rely on forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations, and prospects. These forward-looking statements are subject to risks, uncertainties, and other factors described in Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021, as supplemented by our other Securities and Exchange Commission filings, including among other things:
•Our rapid growth may not be sustainable and depends on our ability to attract and retain end-users, and do so in a cost-effective manner.
•Our business could be harmed if we fail to manage our growth effectively.
•We have a history of losses and we may be unable to achieve profitability.
•We rely on our third-party developer partners to continue to offer a competitive experience in existing and new games on our platform.
•A limited number of games account for a substantial portion of our revenue.
•We rely on third-party service providers including cloud computing services, payment processors, and infrastructure service providers, and if we cannot manage our relationships with such providers or lose access to such services, our business, financial condition, results of operations and prospects could be adversely affected.
•Failure to maintain our brand and reputation could harm our business, financial condition and results of operations.
•The broader entertainment industry is highly competitive and our existing and potential users may be attracted to competing forms of entertainment.
•Our business is subject to a variety of U.S. and foreign laws, which are subject to change and could adversely affect our business.
•Failure to obtain, maintain, protect or enforce our intellectual property rights could harm our business, results of operations and financial condition.
•Economic downturns and political and market conditions beyond our control could adversely affect our business, financial condition and results of operations.
•The occurrence of a data breach or other failure of our cybersecurity.
•Failure to properly contain COVID-19 or another global pandemic in a timely manner could materially affect how we and our business partners are operating.
•Failure to timely and effectively remediate the material weaknesses in our internal controls over financial reporting.
These statements are based on our historical performance and on our current plans, estimates and projections in light of information currently available to us, and therefore you should not place undue reliance on them. The inclusion of this forward-looking information should not be regarded as a representation by us or any other person that the future plans, estimates or expectations contemplated by us will be achieved. Forward-looking statements made in this Quarterly Report on Form 10-Q speak only as of the date on which such statements are made, and we undertake no obligation to update them in light of new information or future events, except as required by law.
You should carefully consider the above factors, as well as the factors discussed in other risks described in Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021, as supplemented by our other Securities and Exchange Commission filings. The factors identified above should not be construed as an exhaustive list of factors that could affect our future results and should be read in conjunction with the other cautionary statements that are included in this Quarterly Report. Furthermore, new risks and uncertainties arise from time to time, and it is impossible for us to predict those events or how they may affect us. If any of these trends, risks or uncertainties actually occurs or continues, our business, revenue and financial results could be harmed, the trading price of our Class A common stock could decline and you could lose all or part of your investment.
PART I
ITEM 1. FINANCIAL STATEMENTS
SKILLZ INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands, except for number of shares and par value per share amounts)
| March 31, | December 31, | ||||||||||
| 2022 | 2021 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 114,558 | $ | 241,332 | |||||||
| Marketable securities, current | 369,566 | 319,055 | |||||||||
| Accounts receivable, net | 13,230 | 13,497 | |||||||||
| Prepaid expenses and other current assets | 21,967 | 16,704 | |||||||||
| Total current assets | 519,321 | 590,588 | |||||||||
| Property and equipment, net | 8,629 | 9,988 | |||||||||
| Operating lease right-of-use assets, net | 13,977 | 14,511 | |||||||||
| Marketable securities, non-current | 169,725 | 182,629 | |||||||||
| Non-marketable equity securities | 55,649 | 55,649 | |||||||||
| Intangible assets, net | 75,066 | 79,137 | |||||||||
| Goodwill | 86,436 | 86,845 | |||||||||
| Other long-term assets | 3,733 | 3,478 | |||||||||
| Total assets | $ | 932,536 | $ | 1,022,825 | |||||||
| Liabilities and stockholders’ equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | 13,305 | $ | 19,753 | |||||||
| Operating lease liabilities, current | 2,005 | 2,110 | |||||||||
| Other current liabilities | 57,607 | 64,969 | |||||||||
| Total current liabilities | 72,917 | 86,832 | |||||||||
| Operating lease liabilities, non-current | 13,199 | 13,567 | |||||||||
| Common stock warrant liabilities, non-current | 1,831 | 6,293 | |||||||||
| Long-term debt, non-current | 279,713 | 278,889 | |||||||||
| Other long-term liabilities | 13,238 | 13,544 | |||||||||
| Total liabilities | 380,898 | 399,125 | |||||||||
Commitments and contingencies (Note 9) | |||||||||||
| Stockholders’ equity: | |||||||||||
Preferred stock $0.0001 par value; 10 million shares authorized — 0 issued and outstanding as of March 31, 2022 and December 31, 2021 | — | — | |||||||||
Common stock $0.0001 par value; 625 million shares authorized; Class A common stock – 500 million shares authorized; 341 million and 340 million shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively; Class B common stock – 125 million shares authorized; 69 million shares issued and outstanding as of March 31, 2022 and December 31, 2021 | 40 | 40 | |||||||||
| Additional paid-in capital | 1,121,697 | 1,043,600 | |||||||||
| Accumulated other comprehensive loss | (2,294) | (248) | |||||||||
| Accumulated deficit | (567,805) | (419,692) | |||||||||
| Total stockholders’ equity | 551,638 | 623,700 | |||||||||
| Total liabilities and stockholders’ equity | $ | 932,536 | $ | 1,022,825 | |||||||
See accompanying Notes to the Condensed Consolidated Financial Statements.
1
SKILLZ INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited, in thousands, except for number of shares and per share amounts)
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Revenue | $ | 93,438 | $ | 83,677 | |||||||
| Costs and expenses: | |||||||||||
| Cost of revenue | 9,265 | 4,256 | |||||||||
| Research and development | 18,653 | 7,282 | |||||||||
| Sales and marketing | 117,332 | 96,323 | |||||||||
| General and administrative | 92,792 | 27,284 | |||||||||
| Total costs and expenses | 238,042 | 135,145 | |||||||||
| Loss from operations | (144,604) | (51,468) | |||||||||
| Interest expense, net | (8,157) | (24) | |||||||||
| Change in fair value of common stock warrant liabilities | 4,462 | (2,108) | |||||||||
| Other (expense) income, net | (27) | 50 | |||||||||
| Loss before income taxes | (148,326) | (53,550) | |||||||||
| (Benefit from) provision for income taxes | (213) | 42 | |||||||||
| Net loss | $ | (148,113) | $ | (53,592) | |||||||
| Net loss per share attributable to common stockholders: | |||||||||||
Basic | $ | (0.37) | $ | (0.15) | |||||||
| Diluted | $ | (0.37) | $ | (0.16) | |||||||
| Weighted average shares outstanding: | |||||||||||
| Basic | 401,653,954 | 356,818,954 | |||||||||
| Diluted | 401,653,954 | 359,827,649 | |||||||||
| Other comprehensive loss: | |||||||||||
| Change in unrealized loss on available-for-sale investments, net of tax | (2,046) | — | |||||||||
| Total other comprehensive loss: | (2,046) | — | |||||||||
| Comprehensive loss | $ | (150,159) | $ | (53,592) | |||||||
See accompanying Notes to the Condensed Consolidated Financial Statements.
2
SKILLZ INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited, in thousands, except for number of shares)
| Preferred stock | Common stock | Additional paid-in capital | Accumulated Other Comprehensive Loss | Accumulated deficit | Total stockholders’ equity | ||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | — | — | 369,797,524 | 37 | 295,065 | — | (238,315) | 56,787 | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock upon exercise of stock options and release of restricted stock units | — | — | 268,426 | — | 12 | — | — | 12 | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock upon exercise of warrants and other, net | — | — | 8,741,863 | — | 172,519 | — | — | 172,519 | |||||||||||||||||||||||||||||||||||||||
| Net cash contributions from follow-on offering | — | — | 17,000,000 | 2 | 402,238 | — | — | 402,240 | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | 10,945 | — | — | 10,945 | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | (53,592) | (53,592) | |||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2021 | — | $ | — | 395,807,813 | $ | 39 | $ | 880,779 | $ | — | $ | (291,907) | $ | 588,911 | |||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | — | $ | — | 408,753,837 | $ | 40 | $ | 1,043,600 | $ | (248) | $ | (419,692) | $ | 623,700 | |||||||||||||||||||||||||||||||||
| Issuance of common stock upon exercise of stock options and release of restricted stock units | — | — | 879,936 | — | 236 | — | — | 236 | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | 77,925 | — | 77,925 | ||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | (2,046) | — | (2,046) | |||||||||||||||||||||||||||||||||||||||
| Other, net | — | — | — | — | (64) | — | — | (64) | |||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | — | (148,113) | (148,113) | |||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2022 | — | $ | — | 409,633,773 | $ | 40 | $ | 1,121,697 | $ | (2,294) | $ | (567,805) | $ | 551,638 | |||||||||||||||||||||||||||||||||
See accompanying Notes to the Condensed Consolidated Financial Statements.
3
SKILLZ INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Operating Activities | |||||||||||
| Net loss | $ | (148,113) | $ | (53,592) | |||||||
| Adjustment to reconcile net loss to net cash used in operating activities: | |||||||||||
| Depreciation and amortization | 5,539 | 555 | |||||||||
| Stock-based compensation | 77,925 | 10,945 | |||||||||
| Accretion of unamortized debt discount and amortization of debt issuance costs | 824 | 9 | |||||||||
| Amortization of premium (accretion of discount) for marketable securities | 984 | — | |||||||||
| Deferred income taxes | (318) | — | |||||||||
| Change in fair value of common stock warrant liabilities | (4,462) | 2,108 | |||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable, net | 267 | — | |||||||||
| Prepaid expenses and other assets | (5,676) | (4,499) | |||||||||
| Operating lease right-of-use assets | 534 | (13,453) | |||||||||
| Accounts payable | (5,613) | (4,060) | |||||||||
| Operating lease liabilities | (473) | 14,386 | |||||||||
| Other accruals and liabilities | (4,868) | 8,448 | |||||||||
| Net cash used in operating activities | (83,450) | (39,153) | |||||||||
| Investing Activities | |||||||||||
| Purchases of property and equipment, including internal-use software | (107) | (659) | |||||||||
| Purchases of marketable securities | (149,495) | — | |||||||||
| Proceeds from maturities of marketable securities | 83,265 | — | |||||||||
| Proceeds from sales of marketable securities | 25,593 | — | |||||||||
| Net cash used in investing activities | (40,744) | (659) | |||||||||
| Financing Activities | |||||||||||
| Principal payments on finance leases obligations | (840) | — | |||||||||
| Payments for debt issuance costs | (1,976) | — | |||||||||
| Proceeds from issuance of common stock in follow-on offering, net of underwriting commissions, and offering costs | — | 402,817 | |||||||||
| Payments made towards deferred offering costs | — | (13,167) | |||||||||
| Net proceeds from exercise of stock options and issuance of common stock | 236 | 12 | |||||||||
| Net cash (used in) provided by financing activities | (2,580) | 389,662 | |||||||||
| Net change in cash, cash equivalents and restricted cash | (126,774) | 349,850 | |||||||||
| Cash, cash equivalents and restricted cash – beginning of year | 244,252 | 265,648 | |||||||||
| Cash, cash equivalents and restricted cash – end of period | $ | 117,478 | $ | 615,498 | |||||||
| Supplemental cash flow data: | |||||||||||
| Cash paid during the period for: | |||||||||||
| Interest | $ | 86 | $ | 15 | |||||||
| Noncash investing and financing activities: | |||||||||||
| Deferred offering costs and issuance costs in accounts payable and accrued liabilities | $ | 28 | $ | 1,449 | |||||||
| Warrant exercise receivable | $ | — | $ | 104,558 | |||||||
| Warrant liability reclassified to additional paid-in capital | $ | — | $ | 67,961 | |||||||
4
SKILLZ INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in tables are in thousands, unless otherwise noted)
1. Description of the Business and Basis of Presentation
Business
Skillz (the “Company” or “Skillz”) is a mobile eSports platform, driving the future of entertainment by accelerating the convergence of sports, video games and media. The Company’s principal activities are to develop and support a proprietary online-hosted technology platform that enables independent game developers to host tournaments and provide competitive gaming activity (“Competitions”) to end-users worldwide.
Basis of Presentation
The Company’s condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) as determined by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) and pursuant to the regulations of the U.S. Securities and Exchange Commission (“SEC”).
Unaudited Interim Financial Statements
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and in accordance with the rules and regulations of the SEC. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited condensed consolidated financial statements reflect all normal and recurring adjustments that are, in the opinion of the Company’s management, necessary for the fair presentation of the results of operations for the interim periods. Operating results for the three months ended March 31, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021, as filed with the SEC on March 1, 2022.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make certain estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities and the related disclosures at the date of the condensed consolidated financial statements, as well as the reported amounts of revenues and expenses during the periods presented. Estimates are used in several areas including, but not limited to, stock-based compensation, valuation of common stock warrants, the fair values of goodwill and intangible assets and the useful lives of the Company’s intangible assets. The Company bases these estimates on historical experience and on various other assumptions that it believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying amounts of assets and liabilities. Actual results could differ materially from these estimates.
Revenue Recognition
The Company generates substantially all its revenues by providing a service to the game developers aimed at improving the monetization of their game content. The monetization service provided by Skillz allows developers to offer multi-player competition to their end-users which increases end-user retention and engagement. Skillz provides developers with a software development kit (“SDK”) that they can download and integrate with their existing games. The SDK serves as a data interface between Skillz and the game developers that enables Skillz to provide monetization services to the developer.
The Company recognizes revenue for its services in accordance with the FASB Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”).
5
SKILLZ INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in tables are in thousands, unless otherwise noted)
Revenues from Contracts with Customers
The Company applies the five-step model to achieve the core principle of ASC 606. The Company determined that its customer in the provision of its technology platform and services is the game developer. The Company’s ordinary activities consist of providing game developers services through access to its technology platform using the Skillz SDK. The SDK acts as an application programming interface enabling communication of data between Skillz and the game developers, which when integrated with the developer’s game content, facilitates end-user registration into Competitions, managing and hosting end-user Competition accounts, matching players of similar skill levels, collecting end-user entry fees, distributing end-user prizes, resolving end-user disputes pertaining to their participation in Competitions, and running third-party marketing campaigns (“Monetization Services”).
The Company provides Monetization Services to game developers enabling them to offer competitive games to their end-users. These activities are not distinct from each other as the Company provides an integrated service enabling the game developers to provide the competitive game service to the end-users, and as a result, they do not represent separate performance obligations. The Company is entitled to a revenue share based on total entry fees for paid Competitions, regardless of how they are paid, net of end-user prizes (i.e., winnings from the Competitions) and other costs to provide the Monetization Services. The game developers’ revenue share, however, is calculated solely based upon entry fees paid by net cash deposits received from end-users. End-user incentives are not paid for by game developers. In addition, the Company reduces revenue for end-user incentives which are treated as a reduction of revenue.
The Company collects the entry fees and related charges from end-users on behalf of game developers using the end-user’s pre-authorized credit card or PayPal account and withholds its fees before making the remaining disbursement to the game developer; thus, the game developer’s ability and intent to pay is not subject to significant judgment.
Revenue is recognized at the time the performance obligation is satisfied by transferring control of the promised service in an amount that reflects the consideration that the Company expects to receive in exchange for the Monetization Services. The Company recognizes revenue upon completion of a game, which is when its performance obligation to the game developer is satisfied. The Company does not have contract assets or contract liabilities as the payment of the transaction price is concurrent with the fulfillment of the services. At the time of game completion, the Company has the right to receive payment for the services rendered. The Company’s agreements with game developers can generally be terminated for convenience by either party upon thirty days prior written notice, and in certain of the Company’s larger developer agreements, the developer, if required by the Company, must continue to make its games available on the platform for a period of up to twelve months. As the Company is able to terminate the developer agreements at its convenience, the Company has concluded the contract term for revenue recognition does not extend beyond the contractual notification period. The Company did not have any transaction price allocated to performance obligations that are unsatisfied (or partially satisfied) as of March 31, 2022 and 2021.
Games provided by two developer partners, accounted for 41% and 38% of the Company’s revenue in the three months ended March 31, 2022, and 42% and 41% of the Company’s revenue in the three months ended March 31, 2021.
End-User Incentive Programs
To drive traffic to the platform, the Company provides promotions and incentives to end-users in various forms. Evaluating whether a promotion or incentive is a payment to a customer may require significant judgment. Promotions and incentives which are consideration payable to a customer are recognized as a reduction of revenue at the later of when revenue is recognized or when the Company pays or promises to pay the incentive. Promotions and incentives recorded as sales and marketing expense are recognized when the related cost is incurred by the Company. In either case, the promotions and incentives are recognized when they are used by end-users to enter into a paid Competition.
•Marketing promotions and discounts accounted for as a reduction of revenue. These promotions are typically pricing actions in the form of discounts that reduce the end-user entry fees and are offered on behalf of the game developers. Although not required based on the Company’s agreement with its developers, the Company considers that the game developers have a valid expectation that certain incentives will be offered to end-users. The determination of a valid expectation is based on the evaluation of all information reasonably available to the game developers regarding the Company’s customary business practices, published policies and specific statements.
6
SKILLZ INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in tables are in thousands, unless otherwise noted)
An example of an incentive for which the game developer has a valid expectation is Ticketz, which are a virtual currency earned for every Competition played based on the amount of the entry fee (“Ticketz”). Ticketz can be redeemed for prizes, including bonus cash prizes, a promotional incentive that cannot be withdrawn and can only be used by end-users to enter into paid entry fee contests (“Bonus Cash”). Another example is initial deposit Bonus Cash which is a promotional incentive that can be earned in fixed amounts when an end-user makes an initial deposit on the Skillz platform. Bonus Cash can only be used by end-users to enter into future paid entry fee Competitions and cannot be withdrawn by end-users.
For the three months ended March 31, 2022 and 2021, the Company recognized a reduction of revenue of $16.3 million and $17.6 million, respectively, related to these end-user incentives.
•Marketing promotions accounted for as sales and marketing expense. When the Company concludes that the game developers do not have a valid expectation that the incentive will be offered, the Company records the related cost as sales and marketing expense. The Company’s assessment is based on an evaluation of all information reasonably available to the game developers regarding the Company’s customary business practices, published policies and specific statements. These promotions are offered to end-users to draw, re-engage, or generally increase end-users’ use of the Company’s platform.
An example of this type of incentive is limited-time Bonus Cash offers, which are targeted to specific end-users, typically those who deposit more frequently or have not made a deposit recently, via email or in-app promotions. The Company targets groups of end-users differently, offering specific promotions it thinks will best stimulate engagement. Similar to Bonus Cash earned from a redemption of Ticketz or an initial deposit, limited-time Bonus Cash can only be used by end-users to enter into future paid entry fee competitions and cannot be withdrawn by end-users. The Company also hosts engagement marketing leagues run over a period of days or weeks, which award league prizes in the form of cash or luxury goods to end-users with the most medals at the end of the league. End-users accumulate medals by winning Skillz enabled paid entry fee competitions. Skillz determines whether or not to run a league, what prizes should be awarded, over what time period the league should run, and to which end-users the prizes should be paid, all at its discretion. The league parameters vary from one league to the next and are not reasonably known to the game developers. League prizes in the form of cash can be withdrawn or used by end-users to enter into future paid entry fee competitions.
For the three months ended March 31, 2022 and 2021, the Company recognized sales and marketing expense of $37.0 million and $33.3 million, respectively, related to these end-user incentives.
From time to time, the Company issues credits or refunds to end-users that are unsatisfied by the level of service provided by the game developer. There is no contractual obligation for the Company to refund such end-users nor is there a valid expectation by the game developers for the Company to issue such credits or refunds to end-users on their behalf. The Company accounts for credits or refunds, which are not recoverable from the game developer, as sales and marketing expenses when incurred.
Total marketing promotions accounted for as sales and marketing expense recognized in three months ended March 31, 2022 and 2021 were $42.1 million and $36.0 million, respectively.
Cash, Cash Equivalents and Restricted Cash
Cash and cash equivalents consist of cash, commercial paper, money market funds and U.S government agency securities with maturities of three months or less when purchased.
Restricted cash maintained under an agreement that legally restricts the use of such funds is not included within cash and cash equivalents and is reported within other long-term assets. Restricted cash is comprised of $2.9 million which is pledged in the form of a letter of credit for the Company’s new headquarters in San Francisco.
7
SKILLZ INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in tables are in thousands, unless otherwise noted)
A reconciliation of the Company’s cash and cash equivalents in the condensed consolidated balance sheets to cash, cash equivalents and restricted cash in the condensed consolidated statement of cash flows is as follows:
| March 31, | December 31, | ||||||||||
| 2022 | 2021 | ||||||||||
| Cash and cash equivalents | $ | 114,558 | $ | 241,332 | |||||||
| Restricted cash | 2,920 | 2,920 | |||||||||
| Cash, cash equivalents and restricted cash | $ | 117,478 | $ | 244,252 | |||||||
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist of cash, cash equivalents, restricted cash, and marketable securities. Although the Company deposits its cash with multiple well-established financial institutions, the deposits, at times, may exceed federally insured limits. The Company has not experienced any losses on its deposits of cash and cash equivalents. Marketable securities are primarily consisted of U.S government, corporate debt securities, asset backed securities, commercial paper, and debt instruments issued by foreign governments. The Company limits the amount of credit exposure to any one issuer. Management believes that the institutions are financially stable and, accordingly, minimal credit risk exists.
Accounts Receivable, Net
Accounts receivable, net, is comprised of trade accounts receivable recorded at the invoiced amounts for programmatic media campaigns, net of an allowance for credit losses. The allowance for credit losses is recorded as an offset to accounts receivable and changes in such are classified as general and administrative expense in the consolidated statements of operations and comprehensive loss. The Company assesses collectability by reviewing accounts receivable on a collective basis where similar characteristics exist and on an individual basis when there are specific customers with known disputes or collectability issues. In determining the amount of the allowance for credit losses, the Company considers historical collectability based on past due status and makes judgments about the creditworthiness of customers based on ongoing credit evaluations. The Company also considers customer-specific information, current market conditions and reasonable and supportable forecasts of future economic conditions to inform adjustments to historical loss data. At March 31, 2022, the Company’s allowance for credit losses on accounts receivable was not significant to the condensed consolidated financial statements.
Fair Value Measurement
The Company applies fair value accounting for financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the condensed consolidated financial statements on a recurring basis. The Company defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining fair value measurements for assets and liabilities, the Company considers the principal or most advantageous market in which it would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as risks inherent in valuation techniques, transfer restrictions and credit risk. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:
•Level 1 — Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
•Level 2 — Inputs reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
8
SKILLZ INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in tables are in thousands, unless otherwise noted)
•Level 3 — Unobservable inputs reflecting management’s estimate of assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.
The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
Certain financial instruments, including debt, are not measured at fair value on a recurring basis in the consolidated balance sheets. The fair value of debt was estimated using primarily level 2 inputs including quoted market prices or present value of future payments discounted by the market interest rates or the fixed rates based on current rates offered to the Company for debt with similar terms and maturities.
Investments
The Company considers all highly liquid interest-earning investments with a maturity of three months or less at the date of purchase to be cash equivalents. The fair values of these investments approximate their carrying values. In general, investments with original maturities of greater than three months and remaining maturities of less than one year are classified as short-term investments. Investments with maturities beyond one year are classified as non-current marketable securities.
Marketable securities are classified as available-for-sale and realized gains and losses are recorded using the specific identification method. Changes in fair value, excluding credit losses and impairments, are recorded in other comprehensive loss. Fair value is calculated based on publicly available market information or other estimates determined by management. If the cost of an investment exceeds its fair value, the Company evaluates, among other factors, general market conditions, credit quality of debt instrument issuers, and the extent to which the fair value is less than cost. To determine credit losses, the Company employs a systematic methodology that considers available quantitative and qualitative evidence. In addition, the Company considers specific adverse conditions related to the financial health of, and business outlook for, the investee. If the Company plans to sell the security or it is more likely than not that the Company will be required to sell the security before recovery, then a decline in fair value below cost is recorded as an impairment charge in other (expense) income, net and a new cost basis in the investment is established. If market, industry, and/or investee conditions deteriorate, the Company may incur future impairments.
The Company has elected to measure its existing investments in non-marketable equity securities at cost, less impairments, with remeasurements to fair value only upon the occurrence of observable price changes in orderly transactions for the identical or similar securities of the same issuer (“measurement alternative”). This election is reassessed each reporting period to determine whether non-marketable equity securities have a readily determinable fair value, in which case they would no longer be eligible for this election and would be measured at fair value. The Company evaluates its non-marketable equity securities for impairment at each reporting period based on a qualitative assessment that considers various potential impairment indicators. Impairment indicators might include, but would not necessarily be limited to, a significant deterioration in the earnings performance, credit rating, asset quality, or business prospects of the investee, a significant adverse change in the regulatory, economic, or technological environment of the investee, a bona fide offer to purchase, an offer by the investee to sell, or a completed auction process for the same or similar securities for an amount less than the carrying amount of the investments in those securities. If an impairment exists, a loss is recognized in the condensed consolidated statements of operations and comprehensive loss for the amount by which the carrying value exceeds the fair value of the investment. Gains and losses resulting from the remeasurement of non-marketable equity securities, including impairment, are recorded through other (expense) income, net in the condensed consolidated statement of operations and comprehensive loss. The Company separately presents investments in non-marketable equity securities within long-term assets on the condensed consolidated balance sheets.
9
SKILLZ INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in tables are in thousands, unless otherwise noted)
Advertising and Promotional Expense
Advertising and promotional expenses are included in sales and marketing expenses within the condensed consolidated statements of operations and comprehensive loss and are expensed when incurred. For the three months ended March 31, 2022 and 2021, advertising expenses, not including marketing promotions related to the Company’s end-user incentive programs, were $59.7 million and $54.5 million, respectively.
Public and Private Common Stock Warrant Liabilities
As part of the Company’s initial public offering, it issued to third party investors 69.0 million units, consisting of one share of Class A common stock and one-fourth of one warrant, at a price of $10.00 per unit. Each whole warrant entitled the holder to purchase one share of Class A common stock at an exercise price of $11.50 per share (the “Public Warrants”). Simultaneously, the Company completed the private sale of 10,033,333 warrants at a purchase price of $1.50 per warrant (the “Private Warrants”) of which 5,016,666 Private Warrants were subsequently forfeited. Each Private Warrant allows the holder to purchase one share of Class A common stock at $11.50 per share. There were zero Public Warrants and 4,535,728 Private Warrants outstanding as of March 31, 2022.
The Private Warrants and the shares of common stock issuable upon the exercise of the Private Warrants are not transferable, assignable or salable, subject to certain limited exceptions. Additionally, the Private Warrants are exercisable for cash or on a cashless basis, and are non-redeemable so long as they are held by the initial purchasers or their permitted transferees. If the Private Warrants are held by someone other than the initial purchasers or their permitted transferees, the Private Warrants will be redeemable by the Company and exercisable by such holders on the same basis as the Public Warrants.
The Company evaluated the Public and Private Warrants under ASC 815-40, Derivatives and Hedging—Contracts in Entity’s Own Equity, (“ASC 815-40”), and concluded that they do not meet the criteria to be classified in stockholders’ equity. Specifically, the exercise of the Public and Private Warrants may be settled in cash upon the occurrence of a tender offer or exchange that involves 50% or more of the Company’s Class A stockholders. As there are two classes of common stock, not all of the stockholders need to participate in such tender offer or exchange to trigger the potential cash settlement and the Company does not control the occurrence of such an event, the Company concluded that the Public Warrants and Private Warrants do not meet the conditions to be classified in equity. Since the Public and Private Common Stock Warrants meet the definition of a derivative under ASC 815, the Company recorded these warrants as liabilities on the balance sheet at fair value, with subsequent changes in their respective fair values recognized in the condensed consolidated statement of operations and comprehensive loss at each reporting date. Because the Public Warrants were publicly traded and thus had an observable market price in an active market, they were valued based on their trading price as of each reporting date.
The Private Warrants are valued using the Black-Scholes-Merton Option (“BSM”) pricing model that is based on the individual characteristics of the warrants on the valuation date, which include the Company’s stock price and assumptions for expected volatility, expected life and risk-free interest rate, as well as the present value of the minimum cash payment component of the instrument for the warrants, when applicable. Changes in the assumptions used could have a material impact on the resulting fair value of each warrant. The primary inputs affecting the value of the warrant liability are the Company’s stock price and volatility in the Company's stock price, as well as assumptions about the probability and timing of certain events, such as a change in control or future equity offerings. Increases in the fair value of the underlying stock or increases in the volatility of the stock price generally result in a corresponding increase in the fair value of the warrant liability; conversely, decreases in the fair value of the underlying stock or decreases in the volatility of the stock price generally result in a corresponding decrease in the fair value of the warrant liability.
Stock-Based Compensation
The Company measures and recognizes compensation expense for all stock-based awards based on estimated grant-date fair values recognized over the requisite service period. For awards that vest solely based on a service condition, the Company recognizes stock-based compensation expense on a straight-line basis over the requisite service period. The compensation expense related to awards with performance conditions is recognized over the requisite service period when the performance conditions are probable of being achieved. The compensation expense related to awards with market conditions is recognized
10
SKILLZ INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in tables are in thousands, unless otherwise noted)
on an accelerated attribution basis over the requisite service period identified as the derived service period over which the market conditions are expected to be achieved, and is not reversed if the market condition is not satisfied. See Note 9 for more information. The Company accounts for forfeitures as they occur. If an employee stock-based award is canceled without the concurrent grant or offer of a replacement award, the cancellation should be treated as a settlement for no consideration and any previously unrecognized compensation cost shall be recognized at the cancellation date. Stock-based awards granted to employees are primarily stock options and restricted stock units.
The Company has primarily granted restricted stock units (“RSUs”), which have a service based vesting condition over a r period, to its employees and members of the Board of Directors since the start of 2021. The Board of Directors determines the fair value of each share of underlying common stock based on the closing price of the Company's common stock on the date of the grant.
For awards with market conditions, the Company determines the grant date fair value utilizing a Monte Carlo valuation model, which incorporates various assumptions including expected stock price volatility, expected term, risk-free interest rates, expected date of a qualifying event, expected capital raise percentage and market capitalization milestones. Given the Company’s limited market trading history, it has estimated the volatility of its common stock on the date of grant of awards with market conditions based on the weighted average historical stock price volatility of comparable publicly-traded companies in its industry group. The Company estimated the expected term of its awards with market conditions based on various exercise scenarios, as these awards are not considered “plain vanilla.” The Company utilized a risk-free interest rate based on the U.S. Treasury yield curve in effect at the time of grant. The Company estimated the expected date of a qualifying event, the expected capital raise percentage and the expected achievement date of market capitalization milestones based on management’s expectations at the time of measurement of the award’s value.
Segments
Operating segments are defined as components of an entity for which separate financial information is available and that is regularly reviewed by the Chief Operating Decision Maker (“CODM”) in deciding how to allocate resources to an individual segment and in assessing performance. During the three months ended March 31, 2022, the Company continued to operate as a single operating and reportable segment as the CODM reviews financial information presented on a consolidated basis for the purposes of making operating decisions, allocation of resources, and evaluating financial performance.
Recently Issued Accounting Pronouncements Not Yet Adopted
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires entities to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606, Revenue from Contracts with Customers, instead of fair value at the acquisition date in accordance with Topic 805. The amendments in ASU 2021-08 will result in the acquirer recording acquired contract assets and liabilities on the same basis that would have been recorded by the acquiree before the acquisition under ASC Topic 606. The amendments in ASU 2021-08 are effective for fiscal years beginning after December 15, 2022, with early adoption permitted. The Company is evaluating the effect of adopting this new accounting guidance.
3. Business Combinations
Acquisition of Aarki, Inc.
On July 16, 2021, the Company completed the acquisition of Aarki, Inc. (“Aarki”) and acquired 100% of the outstanding equity and voting interest of Aarki under the terms of the Agreement and Plan of Merger. The Company transferred $162.3 million in consideration comprised of $95.3 million in cash and the remaining $67.1 million comprised of 4.4 million shares of Skillz Class A common stock to the existing Aarki stockholders. The addition of Aarki’s technology-driven marketing platform is expected to result in significant efficiencies in user-acquisition costs, which can be reinvested to acquire more users to accelerate growth and provide a broader product offering, including media buying capabilities to better serve game developers.
11
SKILLZ INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in tables are in thousands, unless otherwise noted)
The following table summarizes the fair value of the purchase price to acquire Aarki:
Description | Amount | |||||||
Cash | $ | 95,296 | ||||||
Common stock issued (1) | 67,051 | |||||||
Total purchase price | $ | 162,347 | ||||||
_______________
(1) The fair value of the Skillz Class A Common Stock issued in the merger was based on 4,401,663 shares issued on the July 16, 2021 acquisition date at the closing price of the Company’s common stock on such date of $15.23 per share.
The following is an allocation of the purchase price as of July 16, 2021, the acquisition closing date, based on an estimate of the fair value of the assets acquired and liabilities assumed by the Company in the acquisition:
Description | Amount | |||||||
Cash and cash equivalents | $ | 11,309 | ||||||
Accounts receivable, net | 13,700 | |||||||
Prepaid expenses and other current assets | 356 | |||||||
Property, plant and equipment, net | 5,075 | |||||||
Intangible assets, net | 86,800 | |||||||
Other long-term assets | 91 | |||||||
Accounts payable | (445) | |||||||
Accrued professional fees | (3,145) | |||||||
Other current liabilities | (16,471) | |||||||
Deferred tax liabilities | (20,075) | |||||||
Other long-term liabilities | (1,693) | |||||||
Identifiable net assets acquired | 75,502 | |||||||
Goodwill | 86,845 | |||||||
Total purchase price | $ | 162,347 | ||||||
The following is a summary of identifiable intangible assets acquired and their expected lives as of the acquisition closing date:
| Type | Weighted-average useful life (in years) | Fair Value | ||||||||||||
| Developed technology | 8 | $ | 60,400 | |||||||||||
| Customer relationships | 3 | 26,200 | ||||||||||||
| Trademark and trade name | 0.3 | 200 | ||||||||||||
| Total identifiable intangible assets acquired | $ | 86,800 | ||||||||||||
During the first quarter of 2022, the Company recorded a measurement period adjustment of $0.4 million to increase the carrying value of the identifiable net assets acquired, with a corresponding decrease to goodwill. The adjustment is related to a subsequent adjustment to Aarki’s federal and state tax payable as of the acquisition closing date.
The following table presents details of changes to the Company’s goodwill balance for the three months ended March 31, 2022:
| Goodwill | ||||||||
| Balance at December 31, 2021 | $ | 86,845 | ||||||
| Goodwill adjustment | (409) | |||||||
| Balance as of March 31, 2022 | $ | 86,436 | ||||||
12
SKILLZ INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in tables are in thousands, unless otherwise noted)
4. Balance Sheet Components
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following as of March 31, 2022 and December 31, 2021:
| March 31, | December 31, | ||||||||||
| 2022 | 2021 | ||||||||||
| Credit card processing reserve | $ | 10,450 | $ | 9,527 | |||||||
| Prepaid expenses | 10,427 | 5,681 | |||||||||
| Other current assets | 1,090 | 1,496 | |||||||||
| Prepaid expenses and other current assets | $ | 21,967 | $ | 16,704 | |||||||
Intangible Assets, Net
The components of intangible assets consisted of the following as of March 31, 2022:
| Weighted Average Remaining Useful Life (in years) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||||
| Developed technology | 7.33 | $ | 60,400 | $ | (5,348) | $ | 55,052 | ||||||||||||||||
| Customer relationships | 2.33 | 26,200 | (6,186) | 20,014 | |||||||||||||||||||
| Trademark and trade name | 0.00 | 200 | (200) | — | |||||||||||||||||||
| Intangible assets, net | $ | 86,800 | $ | (11,734) | $ | 75,066 | |||||||||||||||||
The following table sets forth the activity related to finite-lived intangible assets:
| Three Months Ended March 31, | |||||
| 2022 | |||||
| Beginning balance at December 31, 2021 | $ | 79,137 | |||
| Amortization | (4,071) | ||||
| Ending balance at March 31, 2022 | $ | 75,066 | |||
The following table summarizes amortization expense associated with finite-lived intangible assets recognized in the condensed consolidated statements of operations and comprehensive loss for the three months ended March 31, 2022 as follows:
| Three Months Ended March 31, | |||||
| 2022 | |||||
| Cost of revenue | $ | 1,888 | |||
| Sales and marketing | 2,183 | ||||
| General and administrative | — | ||||
| Total amortization expense | $ | 4,071 | |||
13
SKILLZ INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in tables are in thousands, unless otherwise noted)
The following table outlines the estimated future amortization expense related to finite intangible assets as of March 31, 2022:
| Amount | |||||
| 2022 | $ | 12,212 | |||
| 2023 | 16,283 | ||||
| 2024 | 12,281 | ||||
| 2025 | 7,550 | ||||
| 2026 | 7,550 | ||||
| Thereafter | 19,190 | ||||
| Total | $ | 75,066 | |||
Other Current Liabilities
Other current liabilities consisted of the following as of March 31, 2022 and December 31, 2021:
| March 31, | December 31, | ||||||||||
| 2022 | 2021 | ||||||||||
| Accrued sales and marketing expenses | $ | 13,425 | $ | 28,895 | |||||||
| Accrued compensation | 10,737 | 12,108 | |||||||||
| Accrued publisher fees | 7,242 | 3,912 | |||||||||
| End-user liability, net | 3,562 | 4,118 | |||||||||
| Accrued developer revenue share | 1,147 | 1,655 | |||||||||
| Short-term lease obligations | 2,043 | 2,447 | |||||||||
| Accrued legal expenses | 4,757 | 5,126 | |||||||||
| Accrued interest expense | 8,773 | 956 | |||||||||
| Other accrued expenses | 5,921 | 5,752 | |||||||||
| Other current liabilities | $ | 57,607 | $ | 64,969 | |||||||
14
SKILLZ INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in tables are in thousands, unless otherwise noted)
5. Fair Value Measurements
As of March 31, 2022 and December 31, 2021, the recorded values of cash and cash equivalents, restricted cash, accounts receivable and accounts payable approximate their respective fair values due to the short-term nature of the instruments.
Cash and cash equivalents held by the Company as of March 31, 2022 and December 31, 2021 were $114.6 million and $241.3 million, respectively, and were comprised of cash on hand, money market funds, and highly liquid investments with original contractual maturity dates of three months or less. Cash and money market funds are classified within Level 1 of the fair value hierarchy. Highly liquid investments such as commercial papers and corporate bonds are classified within Level 2 of the fair value hierarchy.
The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis as of March 31, 2022 and December 31, 2021:
As of March 31, 2022 | ||||||||||||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||
Available-for-Sale Investments | ||||||||||||||||||||||||||
Asset backed securities | $ | — | $ | 113,038 | $ | — | $ | 113,038 | ||||||||||||||||||
Certificates of deposits | — | 6,000 | — | 6,000 | ||||||||||||||||||||||
Corporate notes and bonds | — | 234,237 | — | 234,237 | ||||||||||||||||||||||
Commercial paper | — | 129,202 | — | 129,202 | ||||||||||||||||||||||
Foreign government securities | — | 18,151 | — | 18,151 | ||||||||||||||||||||||
US Government Securities | 44,974 | 27,959 | — | 72,933 | ||||||||||||||||||||||
Total assets | $ | 44,974 | $ | 528,588 | $ | — | $ | 573,562 | ||||||||||||||||||
Liabilities: | ||||||||||||||||||||||||||
Private Common Stock Warrants | — | — | 1,831 | 1,831 | ||||||||||||||||||||||
Total liabilities | $ | — | $ | — | $ | 1,831 | $ | 1,831 | ||||||||||||||||||
| As of December 31, 2021 | ||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||
| Available-for-Sale Investments | ||||||||||||||||||||||||||
| Asset backed securities | $ | — | $ | 111,552 | $ | — | $ | 111,552 | ||||||||||||||||||
| Certificates of deposits | — | 6,002 | — | 6,002 | ||||||||||||||||||||||
| Corporate notes and bonds | — | 206,989 | — | 206,989 | ||||||||||||||||||||||
| Commercial paper | — | 109,391 | — | 109,391 | ||||||||||||||||||||||
| Foreign government securities | — | 8,181 | — | 8,181 | ||||||||||||||||||||||
| US Government Securities | 86,787 | — | — | 86,787 | ||||||||||||||||||||||
Total assets | $ | 86,787 | $ | 442,114 | $ | — | $ | 528,902 | ||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||
Private Common Stock Warrants | — | — | 6,293 | 6,293 | ||||||||||||||||||||||
Total liabilities | $ | — | $ | — | $ | 6,293 | $ | 6,293 | ||||||||||||||||||
15
SKILLZ INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in tables are in thousands, unless otherwise noted)
Available-for-Sale Investments
Available-for-sale investments were classified within Level 1 or Level 2 because the Company’s use quoted market prices or alternative pricing sources and models utilizing market observable inputs to determine their fair value. The market values of Level 2 investments are determined based on observable inputs for the securities other than quoted prices, such as interest rates, yield curves, and credit spreads, or quoted prices for identical or similar securities in markets that are not considered active. There were no transfers between levels during the periods presented.
Private Common Stock Warrants
The Private Warrants were classified within Level 3 as they were valued based on a BSM pricing model, which involved the use of certain unobservable inputs, such as expected volatility estimated based on the average historical stock price volatility of comparable companies.
The following is a rollforward of balances for Private Warrants:
Private Warrants | ||||||||
Balance at December 31, 2021 | $ | 6,293 | ||||||
Fair market value adjustment | (4,462) | |||||||
Balance as of March 31, 2022 | $ | 1,831 | ||||||
6. Investments
Investment Components
The components of investments were as follows:
| As of March 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||
| Adjusted Cost Basis | Unrealized Gains | Unrealized Losses | Fair Value | Cash and Cash Equivalents | Marketable Securities - Current | Marketable Securities - Non-current | ||||||||||||||||||||||||||||||||||||||
Asset backed securities | $ | 113,392 | $ | 3 | $ | (357) | $ | 113,038 | $ | — | $ | 6,364 | $ | 106,674 | ||||||||||||||||||||||||||||||
Certificates of deposits | 6,005 | — | (5) | 6,000 | — | 6,000 | — | |||||||||||||||||||||||||||||||||||||
Corporate notes and bonds | 235,942 | 2 | (1,707) | 234,237 | — | 171,187 | 63,051 | |||||||||||||||||||||||||||||||||||||
Commercial paper | 129,290 | 4 | (93) | 129,202 | 26,282 | 102,921 | — | |||||||||||||||||||||||||||||||||||||
Money market funds | 5,615 | — | — | 5,615 | 5,615 | — | — | |||||||||||||||||||||||||||||||||||||
Foreign government securities | 18,289 | — | (137) | 18,151 | — | 18,151 | — | |||||||||||||||||||||||||||||||||||||
US government and agency securities | 72,938 | 1 | (5) | 72,934 | 7,989 | 64,943 | — | |||||||||||||||||||||||||||||||||||||
Total investments | $ | 581,471 | $ | 10 | $ | (2,304) | $ | 579,177 | $ | 39,886 | $ | 369,566 | $ | 169,725 | ||||||||||||||||||||||||||||||
16
SKILLZ INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in tables are in thousands, unless otherwise noted)
| As of December 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||
| Adjusted Cost Basis | Unrealized Gains | Unrealized Losses | Fair Value | Cash and Cash Equivalents | Marketable Securities - Current | Marketable Securities - Non-current | ||||||||||||||||||||||||||||||||||||||
| Asset backed securities | $ | 111,619 | $ | 1 | $ | (68) | $ | 111,552 | $ | — | $ | 5,372 | $ | 106,180 | ||||||||||||||||||||||||||||||
| Certificates of deposits | 6,002 | — | — | 6,002 | — | 6,002 | — | |||||||||||||||||||||||||||||||||||||
| Corporate notes and bonds | 207,169 | 21 | (201) | 206,990 | 3,026 | 132,688 | 71,276 | |||||||||||||||||||||||||||||||||||||
| Commercial paper | 109,391 | — | — | 109,391 | 24,193 | 85,198 | — | |||||||||||||||||||||||||||||||||||||
| Money market funds | 51,768 | — | — | 51,768 | 51,768 | — | ||||||||||||||||||||||||||||||||||||||
| Foreign government securities | 8,186 | — | (5) | 8,181 | — | 3,008 | 5,173 | |||||||||||||||||||||||||||||||||||||
| US government securities | 86,783 | 4 | — | 86,787 | — | 86,787 | — | |||||||||||||||||||||||||||||||||||||
| Total investments | $ | 580,918 | $ | 26 | $ | (274) | $ | 580,671 | $ | 78,987 | $ | 319,055 | $ | 182,629 | ||||||||||||||||||||||||||||||
Non-marketable equity securities are investments in privately held companies without readily determinable fair values. The carrying value of the Company’s investments without readily determinable fair values was $55.6 million as of March 31, 2022 and December 31, 2021, and was classified within “Investments in non-marketable equity securities” in the condensed consolidated balance sheets. The Company did not record any adjustments to the carrying value of its non-marketable equity securities accounted for under the measurement alternative, and did not recognize any gains or losses related to the sale of non-marketable equity securities in the three months ended March 31, 2022.
Unrealized Losses on Marketable Securities
The Company did not have any marketable securities with unrealized losses for more than 12 months. Unrealized losses from fixed-income securities are primarily attributable to changes in interest rates.
Marketable Securities Maturities
Adjusted | Estimated | |||||||||||||
Cost Basis | Fair Value | |||||||||||||
March 31, 2022 | ||||||||||||||
Due in one year or less | $ | 370,511 | $ | 369,566 | ||||||||||
Due after one year through five years | 171,074 | 169,725 | ||||||||||||
Due after five years through ten years | — | — | ||||||||||||
Total | $ | 541,585 | $ | 539,291 | ||||||||||
17
SKILLZ INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in tables are in thousands, unless otherwise noted)
7. Long-Term Debt
Components of long-term debt were as follows as of March 31, 2022 and December 31, 2021:
March 31, | December 31, | ||||||||||
| 2022 | 2021 | ||||||||||
2021 Senior Secured Notes | $ | 300,000 | $ | 300,000 | |||||||
Unamortized discount and issuance costs | (20,287) | (21,111) | |||||||||
Net carrying amount | $ | 279,713 | $ | 278,889 | |||||||
Current portion of long-term debt | $ | — | $ | — | |||||||
Non-current portion of long-term debt | $ | 279,713 | $ | 278,889 | |||||||
2021 Senior Secured Notes
In December 2021, the Company entered into a $300 million 10.25% secured notes in a private placement to certain institutional buyers. The interest is payable semiannually on June 15 and December 15 of each year, beginning on June 15, 2022. The effective interest rate on the notes is 12.14%. The notes will mature on December 15, 2026 unless repurchased or redeemed earlier. The secured notes contain customary covenants restricting the Company’s ability to incur debt, incur liens, make distributions to stockholders, make certain transactions with our affiliates, as well as certain other financial covenants. The Company was in compliance with all covenants as of March 31, 2022.
In accounting for the senior secured notes, unamortized discount and issuance costs were deducted from the carrying value in the condensed consolidated balance sheet. Issuance costs will be recognized as interest expense over the five-year term of the senior secured notes. The senior secured notes are classified as Level 2 financial instruments, and its fair value is presented for disclosure purposes only. The Company determined the fair value of the notes is $261 million as of March 31, 2022 based on secondary market quotes.
Interest is paid semi-annually. Accrued interest as of March 31, 2022 was $8.8 million, and was recorded within other current liabilities in the Company’s condensed consolidated balance sheets. No cash has been paid for interest as of March 31, 2022.
The following table outlines maturities of the principle related to the Company’s long-term debt, including the current portion, as of March 31, 2022:
Amount | ||||||||
| 2022 (excluding the three months ended March 31, 2022) | $ | — | ||||||
| 2023 | — | |||||||
| 2024 | — | |||||||
| 2025 | — | |||||||
| 2026 | 300,000 | |||||||
Total | $ | 300,000 | ||||||
18
SKILLZ INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in tables are in thousands, unless otherwise noted)
8. Leases
The Company is a party to various non-cancelable operating lease agreements for certain of its offices. The Company is a party to various non-cancelable finance lease agreements for certain network equipment. The leases have original lease periods expiring between 2022 to 2030. Some leases include one or more options to renew. The Company does not assume renewals in its determination of the lease term unless the renewals are deemed to be reasonably assured at lease commencement. The lease agreements generally do not contain any material residual value guarantees or material restrictive covenants.
The Company adopted Accounting Standards Update 2016-02, Leases (“ASC 842”), which supersedes the guidance in Accounting Standards Codification (“ASC”) 840, Leases (“ASC 840”), effective January 1. 2021. As the Company elected the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the Jumpstart Our Business Startups Act of 2012, ASU 842 was not adopted until the fourth quarter of 2021. The comparative information for the three months ended March 31, 2021 have been adjusted to reflect impact of the adoption of ASC 842 as of January 1, 2021. The adoption did not impact the Company’s prior year consolidated statements of operations and comprehensive loss and statements of stockholders’ equity for the three-month period ended March 31, 2021. There was no impact on the Company’s prior year total cash used in operating activities in the Company’s condensed consolidated statement of cash flows; however, the Company has adjusted the operating lease right-of-use assets ($13.5 million decrease), operating lease liabilities ($14.4 million increase) and other accruals and liabilities ($0.9 million decrease) line items within changes in operating assets and liabilities in our condensed consolidated statement of cash flows for the three months ended March 31, 2021 included herein.
As of March 31, 2022, the Company does not have additional operating and finance leases not yet commenced.
9. Commitments and Contingencies
Legal Matters
The Company is a party to certain claims, suits, and proceedings which arise in the ordinary course and conduct of its business and has certain unresolved claims pending, the outcomes of which are not determinable at this time. The Company records a liability when it believes that it is probable that a loss will be incurred and the amount can be reasonably estimated. If the Company determines that a loss is reasonably possible and the loss or range of loss can be reasonably estimated, the Company discloses the possible loss or range of loss. In the Company’s opinion, resolution of pending matters, other than as disclosed herein, is not expected to have a material adverse impact on the results of operations, cash flows, or the Company’s financial position, as of March 31, 2022. Given the unpredictable nature of legal proceedings, there is a reasonable possibility that an unfavorable resolution of one or more such proceedings could in the future materially affect the results of operations, cash flows, or financial position in a particular period. However, based on the information known by the Company, except as set forth herein, any such amount is either immaterial or it is not possible to provide an estimated range of any such possible loss.
On May 15, 2019, a former employee of the Company filed a suit against the Company in the San Francisco Superior Court in California for claims including breach of contract, retaliation and wrongful termination. The case was tried in August and September 2021. The jury found in favor of the former employee and rendered a verdict against the Company for $11.6 million in compensatory damages, and the Company recorded a loss contingency accrual and corresponding general and administrative expenses in such amount in the third quarter of 2021. In April 2022, the judge in the case determined, in light of the Company’s post-verdict motions, that the instructions given to the jury at trial were defective. Accordingly, the judge ordered a new trial on damages or, alternatively, permitted the plaintiff accept a reduced verdict in the amount of $4.35 million. The plaintiff has until May 25, 2022 to decide whether to accept the reduced verdict, proceed with a new trial on damages, or pursue an appeal.
19
SKILLZ INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in tables are in thousands, unless otherwise noted)
10. Common Stock Warrants
As of March 31, 2022, the Company had zero Public Warrants and 4,535,728 Private Warrants outstanding. During the three months ended March 31, 2022, there were no Private Warrants exercised.
As part of FEAC’s initial public offering, 17,250,000 Public Warrants were sold. The Public Warrants entitled the holder thereof to purchase one share of Class A common stock at a price of $11.50 per share, subject to adjustments. The Public Warrants were only exercisable for a whole number of shares of Class A common stock. No fractional shares were issued upon exercise of the warrants. The Public Warrants had an expiration date of 5:00 p.m. New York City time on December 16, 2025, or earlier upon redemption or liquidation. The Public Warrants were listed on the NYSE under the symbol “SKLZ.WS.”
The Company was permitted to call the Public Warrants for redemption starting anytime, in whole and not in part, at a price of $0.01 per warrant, so long as the Company provides not less than 30 days’ prior written notice of redemption to each warrant holder, and if, and only if, the reported last sale price of Class A common stock equaled or exceeded $18.00 per share for any 20 trading days within a 30-trading day period ending on the third trading day prior to the date the Company sent the notice of redemption to the warrant holders, provided there was an effective registration statement covering the shares of Class A common stock issuable upon exercise of the warrants at such time.
On July 16, 2021, the Company announced the redemption of all Public Warrants that remained outstanding on August 16, 2021. On August 16, 2021, 5,888,294 Public Warrants remained unexercised at 5pm New York City time, and such warrants expired and were no longer exercisable, and the holders of those Public Warrants were entitled to receive only the redemption price of $0.01 per warrant.
Simultaneously with FEAC’s initial public offering, FEAC consummated a private placement of 10,033,333 Private Placement Warrants with FEAC’s sponsor. In connection with the FEAC Business Combination, FEAC’s sponsor agreed to forfeit 5,016,666 private placement warrants. Each outstanding Private Placement Warrant is exercisable for one share of Class A common stock at a price of $11.50 per share, subject to adjustment.
The Private Warrants are identical to the Public Warrants, except that the Private Warrants and the shares of Class A common stock issuable upon exercise of the Private Warrants will not be transferable, assignable or salable until 30 days after the completion of the FEAC business combination, subject to certain limited exceptions. Additionally, the Private Warrants will be non-redeemable so long as they are held by the initial purchasers or such purchasers’ permitted transferees. If the Private Warrants are held by someone other than their initial purchasers or their permitted transferees, the Private Warrants will be redeemable by the Company and exercisable by such holders on the same basis as the Public Warrants.
11. Stockholders’ Equity
Common Stock
The Company’s amended and restated certificate of incorporation authorizes the issuance of Class A common stock and Class B common stock. The rights of the holders of Class A common stock and Class B common stock are identical, expect with respect to voting and conversion. Holders of Class A common stock are entitled to one vote per share and holders of Class B common stock are entitled to 20 votes per share. Shares of Class B common stock are convertible into an equivalent number of shares of Class A common stock and generally convert into shares of Class A common stock upon transfer. Any dividends paid to the holders of Class A common stock and Class B common stock will be paid on a pro rata basis. On a liquidation event, any distribution to common stockholders is made on a pro rata basis to the holders of the Class A common stock and Class B common stock.
As of March 31, 2022, the Company has authorized a total of 635 million shares, consisting of 500 million shares of Class A common stock, par value $0.0001 per share (“Class A common stock”), 125 million shares of Class B common stock, par value $0.0001 per share (“Class B common stock”), and 10 million shares of preferred stock, par value $0.0001 per share (“preferred stock”).
In March 2021, the Company completed an underwritten public offering of its Class A common stock and issued 17,000,000 shares of Class A common stock, for an aggregate purchase price of $408.0 million, before issuance costs of $5.9
20
SKILLZ INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in tables are in thousands, unless otherwise noted)
million. In connection with the public offering, certain stockholders of the Company sold an aggregate of 19.8 million shares, including the full exercise of the underwriters’ option to purchase an additional 4.8 million additional shares. The purchase price per share, net of the underwriter discount, was $23.34. The Company incurred transaction costs of $6.8 million in connection with this sale of shares by certain stockholders, which was recorded as a general and administrative expense during the three months ended March 31, 2021.
12. Stock-Based Compensation
The following table summarizes stock-based compensation expense recognized for the three months ended March 31, 2022 and 2021 as follows:
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Research and development | $ | 2,354 | $ | 1,207 | |||||||
| Sales and marketing | 2,879 | 1,838 | |||||||||
| General and administrative | 72,692 | 7,900 | |||||||||
| Total stock-based compensation expense | $ | 77,925 | $ | 10,945 | |||||||
Equity Incentive Plans
Skillz Inc. 2020 Omnibus Incentive Plan
In December 2020, the Board of Directors of the Company adopted the Skillz Inc. 2020 Omnibus Incentive Plan (the “2020 Plan”). The 2020 Plan became effective upon consummation of the FEAC Business Combination and succeeds the Company’s legacy equity incentive plans. Under the 2020 Plan, the Company may grant stock-based awards to purchase or directly issue shares of common stock to employees, directors and consultants. Options are granted at a price per share equal to the fair market value of the underlying common stock at the date of grant. Options granted are exercisable over a maximum term of 10 years from the date of grant. Restricted stock units (“RSUs”) are also granted under the 2020 Plan. These awards typically have a cliff vesting period of one year and continue to vest quarterly thereafter. The 2020 Plan also permits the Company to grant stock-based awards with performance or market conditions. In connection with the closing of the FEAC Business Combination, the Company entered into certain option agreements that include vesting conditions contingent upon the attainment of volume weighted average price targets related to the Company’s Class A common stock on the NYSE.
The 2020 Plan permits the Company to deliver up to 86,771,777 shares of common stock pursuant to awards issued under the 2020 Plan, consisting of 15,000,000 shares which may be of Class A and/or Class B common stock, 56,264,600 shares of Class A common stock and 15,507,177 shares of Class B common stock. The total number of shares of Class A common stock and Class B common stock that will be reserved and that may be issued under the 2020 Plan will automatically increase on the first trading day of each calendar year, beginning with calendar year 2021, by a number of shares equal to five percent 5% of the total number of shares of Class A common stock and Class B common stock, respectively, outstanding on the last day of the prior calendar year.
21
SKILLZ INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in tables are in thousands, unless otherwise noted)
Stock Options and Restricted Stock Units
Stock option and RSU activity during the three months ended March 31, 2022 is as follows (in thousands, except for share, per share, and contractual term data):
| Options Outstanding | Restricted Stock Units | ||||||||||||||||||||||||||||||||||||||||
| Number of Shares Available for Issuance Under the Plan | Number of Shares Outstanding Under the Plan | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | Number of Plan shares outstanding | Weighted-Average Grant Date Fair Value per share | |||||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | 51,437,898 | 27,727,088 | $ | 7.79 | 7.04 | $ | 113,110 | 7,600,097 | $ | 13.17 | |||||||||||||||||||||||||||||||
| Additional shares authorized | 20,437,691 | — | — | ||||||||||||||||||||||||||||||||||||||
| Options and restricted stock units granted | (6,062,088) | — | — | 6,062,088 | 2.86 | ||||||||||||||||||||||||||||||||||||
| Options exercised and restricted stock units released | — | (774,983) | 0.30 | (104,953) | 18.65 | ||||||||||||||||||||||||||||||||||||
| Options and restricted stock units canceled | 868,193 | (198,648) | 1.26 | (669,545) | 11.94 | ||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2022 | 66,681,694 | 26,753,457 | $ | 8.06 | 6.88 | $ | 40,977 | 12,887,687 | $ | 8.34 | |||||||||||||||||||||||||||||||
| Exercisable at December 31, 2021 | 13,157,036 | $ | 0.15 | 5.17 | $ | 95,946 | |||||||||||||||||||||||||||||||||||
| Exercisable at March 31, 2022 | 12,842,842 | 0.16 | 5.09 | 36,610 | |||||||||||||||||||||||||||||||||||||
| Unvested at December 31, 2021 | 14,570,052 | 14.69 | 8.72 | 17,164 | |||||||||||||||||||||||||||||||||||||
| Unvested at March 31, 2022 | 13,910,615 | 15.36 | 8.53 | 4,367 | |||||||||||||||||||||||||||||||||||||
The number of unvested stock options as of March 31, 2022 and December 31, 2021 does not include 7.2 million and 8.2 million shares of restricted common stock, respectively, previously issued upon the early exercise of grants by certain executives.
The number of RSUs granted and outstanding does not include 2.0 million performance based RSUs which the Company issued as of March 31, 2022, as the performance-based RSUs are not deemed granted for accounting purposes. The stock option and RSU activity presented in the table above does not include activity related to the 2021 CEO Performance Award and Founders' Option Agreements, both described below.
As of March 31, 2022, unrecognized stock-based compensation expense related to unvested stock options, restricted common stock, RSUs, performance-based RSUs and performance stock units was $177.3 million. The weighted-average period over which such compensation expense will be recognized is 3.24 years.
The aggregate intrinsic value of options exercised was $2.6 million and $7.9 million during the three months ended March 31, 2022 and 2021, respectively.
2021 CEO Performance Award
In September 2021, the Company granted the Company’s Chief Executive Officer (“CEO”), an award of up to 16.1 million performance stock units (the “CEO Performance Award”) under the Company’s 2020 Plan, pursuant to which the CEO may earn one share of the Company’s Class A Common Stock for each performance stock unit that vests based on the achievement of certain Market Capitalization Milestones (as defined in the award agreement for the CEO Performance Award).
22
SKILLZ INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in tables are in thousands, unless otherwise noted)
The performance stock units were divided into four tranches, with each tranche corresponding to a Market Capitalization Milestone ranging from two to five times the Company’s market capitalization baseline. Each tranche vested if and when the Company’s market capitalization equals or exceeds the corresponding Market Capitalization Milestone at any point during the seven-year performance period following the grant date (the “Performance Period”). For purposes of determining achievement of the Market Capitalization Milestones, the Company’s market capitalization was calculated based on the trailing 60-trading day volume weighted average price per share (“VWAP”) of the Company’s Class A common stock and the average number of outstanding shares during such period. The Company’s market capitalization baseline was calculated using the trailing 30-trading day VWAP of the Company’s Class A common stock on the grant date and the average number of outstanding shares during such period.
The $70.8 million grant date fair value of the CEO Performance Award was estimated using a model based on multiple stock price paths developed through the use of a Monte Carlo simulation that incorporates into the valuation the possibility that the market condition targets may not be satisfied.
On March 14, 2022 (“cancellation date”), the Board of Directors of Skillz and the CEO, entered into an agreement to cancel this CEO Performance Award. The Company determined that the cancellation of the CEO Performance Award was a settlement for no consideration and not accompanied by a concurrent grant (or offer to grant) of a replacement award. As a result, the Company recorded the remaining unrecognized compensation costs related to the CEO Performance Award of $65.1 million during three months ended March 31, 2022.
`
Founders’ Option Agreements
In December 2020, the Company entered into option agreements with each of the CEO and CRO (the “Option Agreements”) awarding options to purchase (i) 9,960,000 shares of New Skillz Class B common stock to the CEO and (ii) 2,040,000 shares of Class A common stock to the CRO. The options will vest in three equal increments as follows (i) one-third (1/3) of the options shall vest and become exercisable as of the date, following the grant date, that the volume weighted average price on the NYSE over a ten (10) trading day period of underlying Skillz Class A common stock (“VWAP”) equals or exceeds 3.0x the VWAP of the shares as of the Closing Date (as defined in the Options Agreements), (ii) one-third (1/3) of the options shall vest and become exercisable as of the date, following the grant date, that the VWAP of the shares equals or exceeds 4.0x the VWAP of the shares as of the Closing Date; and (iii) one-third (1/3) of the options shall vest and become exercisable as of the date, following the grant date, that the VWAP of the shares equals or exceeds 5.0x the VWAP of the shares as of the Closing Date. The $93.4 million grant date fair value of the Founders’ Options was estimated using a model based on multiple stock price paths developed through the use of a Monte Carlo simulation that incorporates into the valuation the possibility that the market condition targets may not be satisfied. The significant inputs to the valuation included the Company’s Class A stock price and the risk-free interest rate as of the grant date, as well as the estimated volatility of the Company’s Class A common stock. For the three months ended March 31, 2022, the Company recognized $4.8 million in compensation expense related to these grants. As of March 31, 2022, the unrecognized stock-based compensation cost related to Founders’ Option Agreements was $68.4 million.
13. Income Taxes
The Company’s (benefit from) provision for income taxes was $(213) thousand and $42 thousand for the three months ended March 31, 2022 and 2021, respectively. This represents an effective tax rate for the respective periods of 0.14% and (0.08)%. The Company has historically been in an overall loss position and is only subject to state and foreign taxes. The Company maintains a full valuation allowance for all of its deferred tax assets. The effective tax rate differs from the federal statutory rate due to the valuation allowance, as well as due to foreign taxes and state taxes.
14. Related-Party Transactions
The Company did not have any material related party transactions in the three months ended March 31, 2022 and 2021.
23
SKILLZ INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in tables are in thousands, unless otherwise noted)
15. Net Loss Per Share
The Company computes net loss per share of the Class A common stock and Class B common stock using the two-class method required for participating securities. Basic and diluted loss per share are the same for each class of common stock because they are entitled to the same liquidation and dividend rights. The effect of potentially dilutive common shares is reflected in diluted earnings per share by application of the treasury stock method.
The following table sets forth the computation of basic and diluted loss per Class A common stock and Class B common stock (in thousands, except for share and per share data):
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Numerator: | |||||||||||
| Net loss – basic | $ | (148,113) | $ | (53,592) | |||||||
| Denominator: | |||||||||||
Weighted average common shares outstanding – basic | 401,653,954 | 356,818,954 | |||||||||
| Net income (loss) per share attributable to common stockholders – basic | $ | (0.37) | $ | (0.15) | |||||||
| Numerator: | |||||||||||
| Net loss – basic | $ | (148,113) | $ | (53,592) | |||||||
| Decrease in fair value of public and private common stock warrant liabilities | — | (3,799) | |||||||||
| Net loss – diluted | $ | (148,113) | $ | (57,391) | |||||||
| Denominator: | |||||||||||
| Weighted average common shares outstanding – basic | 401,653,954 | 356,818,954 | |||||||||
| Incremental common shares from assumed exercise of public and private common stock warrants | — | 3,008,695 | |||||||||
| Weighted average common shares outstanding – diluted | 401,653,954 | 359,827,649 | |||||||||
| Net loss per share attributable to common stockholders – diluted | $ | (0.37) | $ | (0.16) | |||||||
The following outstanding common stock equivalents were considered antidilutive, and therefore, excluded from the computation of diluted net income (loss) per share attributable to common stockholders for the periods presented (share numbers are not in thousands).
| As of March 31 | |||||||||||
| 2022 | 2021 | ||||||||||
| Common stock warrants | 4,535,728 | 8,157,942 | |||||||||
| Common stock options | 33,999,568 | 51,121,618 | |||||||||
| Restricted stock units | 6,062,088 | 1,521,335 | |||||||||
| Total | 44,597,384 | 60,800,895 | |||||||||
24
SKILLZ INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in tables are in thousands, unless otherwise noted)
16. Geographical Information
No sales to a country other than the United States accounted for more than 10% of revenue for the three months ended March 31, 2022 or 2021. Revenue, classified by the major geographic areas where the end users were located when they entered paid competitions, was as follows:
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| United States | 69,177 | 72,382 | |||||||||
| Other countries | 24,261 | 11,295 | |||||||||
| Total | $ | 93,438 | $ | 83,677 | |||||||
Property and equipment, net and operating lease right-of-use assets by geography is as follows:
| March 31, | December 31, | ||||||||||
| 2022 | 2021 | ||||||||||
| United States | $ | 18,940 | $ | 20,997 | |||||||
| Other countries | 3,666 | 3,502 | |||||||||
| Total | $ | 22,606 | $ | 24,499 | |||||||
25
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand the results of operations and financial condition of Skillz Inc. (for purposes of this section, “Skillz,” “we,” “us” and “our”). MD&A is provided as a supplement to, and should be read in conjunction with, our Annual Report on Form 10-K for the year ended December 31, 2021, and our financial statements and the accompanying Notes to Financial Statements (Part I, Item 1 of this Form 10-Q). This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described in Part II, Item 1A, “Risk Factors”. Actual results may differ materially from those contained in any forward-looking statements. Our historical results are not necessarily indicative of the results that may be expected for any period in the future.
Overview
We operate a marketplace that connects the world through competition, serving both developers and users. Our platform enables fair, fun and competitive gaming experiences and the trust we foster with users is the foundation upon which our community is built. We believe our marketplace benefits from a powerful network effect: compelling content attracts users to our platform, while the increasing size of our audience attracts more developers to create new interactive experiences on our platform.
Skillz was founded in 2012 by Andrew Paradise and Casey Chafkin with the vision to make eSports accessible to everyone possible. As of the three months ended March 31, 2022, the platform had 3.2 million monthly active users (“MAUs”) and hosts an average of over 6 million daily tournaments, including 2 million paid entry daily tournaments, offering over $150 million in prizes each month. As of March 31, 2022, we had over 10,000 registered game developers on our platform that have launched a game integration.
Our culture is built upon a set of values established by our founders, aligning the company and its employees in a common vision. Our seven values are: Honor; Mission; Collaboration; Productivity; Willingness; Frugality; and Balance. Our approach has focused on trust and fairness for users enabling game developers to focus on what they do best: build great content.
Our technology capabilities are industry-leading and provide the tools necessary for developers to compete with the largest and most sophisticated mobile game developers in the world. Our easy-to-integrate software development kit (“SDK”) and developer console allow our developers to monitor, integrate and update their games seamlessly over the air. We ingest and analyze over 300 data points from each game play session, enhancing our data-driven algorithms and LiveOps systems. Moreover, we have developed a robust platform enabling fun, fair and meaningful competitive gameplay.
Historically, our top games and related developers have accounted for a substantial portion of our revenue. For the three months ended March 31, 2022, the game and 2021, the games Solitaire Cube, 21 Blitz (each developed by Tether Studios, LLC (“Tether”)) and Blackout Bingo (developed by Big Run Studios Inc. (“Big Run”)) combined accounted for 71% and 76% of our revenue, respectively. For the three months ended March 31, 2022 and 2021 Tether accounted for 38% and 42% of our revenue, respectively. For the three months ended March 31, 2022 and 2021 Big Run accounted for 42% and 41% of our revenue, respectively.
Our top titles rotate over time as more games generate success on the Skillz platform. In the three months ended March 31, 2022, the number of games that generated over $1 million of annualized GMV grew 8% to 43 from 40 in the three months ended March 31, 2021. GMV represents entry fees that may be paid using cash deposits, prior cash winnings that have not been withdrawn, and end-user incentives.
In addition to growing the number of games experiencing success on our platform, we have historically increased the number of users on our platform and improved the rate of conversion of such users to paying users. For the three months ended March 31, 2022 and 2021, we served 3.2 million and 2.7 million MAUs, respectively, and had ARPU of $9.65 and $10.35, respectively. We monitor the conversion of users to paying users based on the ratio of Paying MAU to MAU. For the three months ended March 31, 2022 and 2021, our Paying MAU to MAU ratio was 18% and 17%, respectively, our Paying MAU was 0.6 million and 0.5 million, respectively and our monthly ARPPU was $54.70 and $59.80, respectively.
On July 16, 2021, the Company completed the acquisition of Aarki, Inc. (“Aarki”) and acquired 100% of the outstanding equity and voting interest of Aarki under the terms of the Agreement and Plan of Merger. The Company paid $162.3 million in
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consideration comprised of $95.3 million in cash and the remaining $67.1 million comprised of 4.4 million shares of Skillz Class A common stock to the existing Aarki stockholders. The addition of Aarki’s technology-driven marketing platform will result in significant efficiencies in user-acquisition costs, which can be reinvested to acquire more users to accelerate growth and provide a broader product offering, including media buying capabilities to better serve game developers. The financial results of Aarki have been included in the Company’s condensed consolidated financial statements since the date of the acquisition.
Our Financial Model
Skillz’s financial model aligns the interests of gamers and developers, driving value for our stockholders. By monetizing through competition, our system eliminates friction that exists in traditional monetization models between the developer and the gamer. The more gamers enjoy our platform, the longer they play, creating more value for Skillz and our developers. By generating higher player to payor conversion, retention and engagement, we are able to monetize users at higher than what our developers would generate through advertisements or in-game purchases.
Our platform allows users to participate in fair competition, while rewarding developers who create games that keep players engaged. We generate revenue by receiving a percentage of player entry fees in paid contests, after deducting end-user prize money (i.e. winnings from the Competitions), end-user incentives accounted for as reduction of revenue and the profit share paid to developers (the “Take Rate”). GMV represents entry fees that may be paid using cash deposits, prior cash winnings that have not been withdrawn, and end-user incentives. Cash deposits represented approximately 11% of total entry fees for the three months ended March 31, 2022 and 2021. Prior cash winnings that have not been withdrawn represented approximately 81% and 82% of total entry fees the three months ended March 31, 2022 and 2021 respectively. End-user incentives represented approximately 8% and 7% of total entry fees for the three months ended March 31, 2022 and 2021. Our model has allowed us to grow users, developers and revenue steadily while driving meaningful operating leverage.
The following are key elements of our financial model:
•The scale, growth and engagement of the users — As we continue to acquire users, our ability to match comparable players, on both skill level and tournament template, in a fair and timely manner improves. Better matching leads to stronger engagement and the ability to create larger tournaments with more profitable take rates. This creates a stickier, more engaging, and continuously improving experience for our players, which in turn attracts more players to our platform, creating a positively reinforcing cycle leading to ever-improving gaming experiences.
•The scale, growth and partnership of our developers — We have created a platform that drives economic success for our developers. Our end-to-end platform allows developers to focus on creating games by automating and optimizing integral parts of their businesses — from user acquisition and monetization to game optimization. Our built-in payments, analytics, customer support, and live operations platform enables our developers to consistently learn, grow, earn and share in our success.
•Product-first philosophy and data science capabilities — We have built a culture that puts product first, driving our impact with users and developers and then scaling marketing investment. For the three months ended March 31, 2022, 48% of our salary costs were spent on product development. Our easy-to-integrate SDK contains over 200 features in a less than 16-MB package which allows for over-the-air upgrades. Our intuitive Developer Console dashboard enables our developers to rapidly integrate and monitor the performance of their games. Our LiveOps system enables us to manage and optimize the user experience across the thousands of games on our platform. We collect over 300 data points during each gameplay session to feed our big data assets which augment all elements of our platform. Our key data science technologies drive our player rating and matching, anti-cheat and anti-fraud, and user experience personalization engine.
•Our unit economics — Our proprietary and highly scalable software platform produces revenue at a low direct cost, contributing to our gross margins. Once acquired, each user cohort contributes predictably to revenue over its life. A cohort is all the users acquired in the period presented. A user is considered part of a cohort based on the first time they make a deposit and enter a paid tournament. Once a user is considered part of a cohort, they are always counted in that cohort.
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Key Components of Results of Operations
Revenue
Skillz provides a service to the game developers aimed at improving the monetization of their game content. The monetization service provided by Skillz allows developers to offer multi-player competition to their end-users which increases end-user retention and engagement.
By utilizing the Skillz monetization services, game developers can enhance the player experience by enabling them to compete in head-to-head matches, live tournaments, leagues, and charity tournaments and increase player retention through referral bonus programs, loyalty perks, on-system achievements and bonus cash. Skillz provides developers with a SDK that they can download and integrate with their existing games. The SDK serves as a data interface between Skillz and the game developers that enables Skillz to provide monetization services to the developer. Specifically, these monetization services include end-user registration services, player matching, fraud and fair play monitoring, and billing and settlement services. The SDK and Skillz monetization services provide the following key benefits to the developers:
•Streamlined game and tournament management allowing players to register with the developer to compete in games for prizes while earning Skillz loyalty perks;
•Fair play in each tournament via the Skillz suite of fairness tools, including skill-based player matching and fraud monitoring;
•Improved end-user retention by rewarding the most loyal players with Ticketz which can be redeemed in the Skillz virtual store and are earned in every match and can be redeemed for prizes or credits to be used towards future paid entry fee tournaments;
•Marketing campaigns through main-stream online advertising networks and social media platforms to drive end-user traffic to developers’ games within the Skillz ecosystem;
•Systematic calls to end-user action via push notifications to users with game results, promotional offers, and time-sensitive actions; and
•Process end-user payments, billings and settlements on behalf of the developer to enable players to connect their preferred payment method to deposit and enter into the game developers’ multi-player competitions for cash prizes.
Generally, end-users are required to deposit funds into their Skillz account in order to be eligible to participate in games for prizes. As part of its monetization services, Skillz is responsible for processing all end-user payments, billings and settlements on behalf of the game developer, such that the game developer does not have to collect directly from or make payments directly to the end-users. When the end-users enter into cash games, the end-users pay an entry fee using cash deposits, prior cash winnings in the end-users’ accounts that have not been withdrawn, and end-user incentives (specifically Bonus Cash). Skillz recognizes revenue related to each game regardless of how entry fees are paid. Skillz is responsible for distributing the prize money to the winner on behalf of the game developer. Skillz typically withholds 16% to 20% of the total entry fees when distributing the prize money as a commission. That commission is shared between Skillz and the game developers; however, the game developers’ share is calculated solely based upon entry fees paid by net cash deposits received from end-users, adjusted for certain costs incurred by Skillz to provide monetization services.
Costs and Expenses
Cost of Revenue
Our cost of revenue consists of variable costs. These include mainly (i) payment processing fees, (ii) customer support costs, (iii) direct software costs, (iv) amortization of internal use software, (v) amortization of intangible assets which include developed technology, and (vi) server costs.
We incur payment processing costs on user deposits. We also incur costs directly related to servicing end-user support tickets on behalf of the game developer that are logged by users directly within the Skillz SDK. These support costs include an allocation of the facilities expense, such as rent, maintenance and utilities costs according to headcount, needed to service these tickets. We use a third party as our cloud computing service; we incur server and software costs as a direct result of running our SDK in our developers’ games.
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Research and Development
Research and development expenses consist of software development costs, comprised mainly of product and platform development, server and software costs that support research and development activities, and to a lesser extent, allocation of rent, maintenance and utilities costs according to headcount. Personnel related expenses consist of salaries, benefits, and stock-based compensation. We expect research and development expenses will fluctuate both in terms of absolute dollars and as a percentage of revenue in the future.
Sales and Marketing
Sales and marketing expenses consist primarily of direct advertising costs and end-user incentives that are not recorded as a reduction of revenue and amortization of intangible assets which include customer relationships. Sales and marketing also includes allocations of rent, maintenance and utilities costs according to headcount. Personnel related expenses consist of salaries, benefits, and stock-based compensation. We expect sales and marketing expenses will fluctuate both in terms of absolute dollars and as a percentage of revenue in the future.
General and Administrative
General and administrative expenses consist of personnel-related expenses for our corporate, executive, finance, and other administrative functions, expenses for outside professional services, and allocation of rent, maintenance and utilities costs according to headcount. Personnel related expenses consist of salaries, benefits and stock-based compensation. General and administrative expenses also includes expenses related to a loss contingency accrual.
We expect our general and administrative expenses, excluding impact of the CEO award cancellation of performance stock units to stock based compensation expenses, to increase for the foreseeable future as we scale headcount with the growth of our business, and as a result of operating as a public company, including compliance with the rules and regulations of the SEC, legal, audit, additional insurance expenses, investor relations activities, and other administrative and professional services.
Results of Operations
The following table sets forth a summary of our results of operations for the periods indicated.
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Revenue | $ | 93,438 | $ | 83,677 | |||||||
| Costs and expenses: | |||||||||||
| Cost of revenue | 9,265 | 4,256 | |||||||||
| Research and development | 18,653 | 7,282 | |||||||||
| Sales and marketing | 117,332 | 96,323 | |||||||||
| General and administrative | 92,792 | 27,284 | |||||||||
| Total costs and expenses | 238,042 | 135,145 | |||||||||
| Loss from operations | (144,604) | (51,468) | |||||||||
| Interest expense, net | (8,157) | (24) | |||||||||
| Change in fair value of common stock warrant liabilities | 4,462 | (2,108) | |||||||||
| Other (expense) income, net | (27) | 50 | |||||||||
| Loss before income taxes | (148,326) | (53,550) | |||||||||
| (Benefit from) provision for income taxes | (213) | 42 | |||||||||
| Net loss | $ | (148,113) | $ | (53,592) | |||||||
Net loss per share attributable to common stockholders: | |||||||||||
| Basic | $ | (0.37) | $ | (0.15) | |||||||
| Diluted | $ | (0.37) | $ | (0.16) | |||||||
| Weighted average shares outstanding: | |||||||||||
| Basic | 401,653,954 | 356,818,954 | |||||||||
| Diluted | 401,653,954 | 359,827,649 | |||||||||
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Revenue
| Three Months Ended March 31, | % Change | |||||||||||||||||||
| (In thousands, except percentages) | 2022 | 2021 | ||||||||||||||||||
| Revenue | $ | 93,438 | $ | 83,677 | 12 | % | ||||||||||||||
Revenue increased by $9.8 million, or 12%, to $93.4 million in the three months ended March 31, 2022 from $83.7 million in the three months ended March 31, 2021. The increase was attributable primarily to revenue from Aarki which was acquired in July of 2021, and an increase in live event tournament revenue, which reflects the Company's strategic focus on increasing the frequency of live events to increase end-user retention and to incentive deposits to continue to participate in such events.
Cost of Revenue
| Three Months Ended March 31, | % Change | |||||||||||||||||||
| (In thousands, except percentages) | 2022 | 2021 | ||||||||||||||||||
| Cost of revenue | $ | 9,265 | $ | 4,256 | 118 | % | ||||||||||||||
Cost of revenue increased by $5.0 million, or 118%, to $9.3 million in the three months ended March 31, 2022 from $4.3 million in the three months ended March 31, 2021. The increase in cost of revenue was primarily driven by server expense attributed to the acquisition of Aarki and the amortization of acquired developed technology intangible assets. Cost of revenue as a percentage of revenue increased to 10% in the three months ended March 31, 2022 compared to 5% in the three months ended March 31, 2021.
Research and Development
| Three Months Ended March 31, | % Change | |||||||||||||||||||
| (In thousands, except percentages) | 2022 | 2021 | ||||||||||||||||||
| Research and development | $ | 18,653 | $ | 7,282 | 156 | % | ||||||||||||||
Research and development costs increased by $11.4 million, or 156%, to $18.7 million in the three months ended March 31, 2022 from $7.3 million in the three months ended March 31, 2021. The increase was primarily driven by a $6.5 million increase in research and development headcount costs, of which $5.1 million related to salaries and bonuses due to an increase in headcount from the acquisition of Aarki, and a $2.4 million increase related to stock-based compensation. Research and development expenses accounted for 20% of revenue in the three months ended March 31, 2022 compared to 9% in the three months ended March 31, 2021.
Sales and Marketing
| Three Months Ended March 31, | % Change | |||||||||||||||||||
| (In thousands, except percentages) | 2022 | 2021 | ||||||||||||||||||
| Sales and marketing | $ | 117,332 | $ | 96,323 | 22 | % | ||||||||||||||
Sales and marketing costs increased by $21.0 million, or 22%, to $117.3 million in the three months ended March 31, 2022 from $96.3 million in the three months ended March 31, 2021. The increase was attributable primarily to a 10% increase in spend to acquire new paying users and a 17% increase in engagement marketing spend. User acquisition marketing costs were $59.7 million and $54.2 million in three months ended March 31, 2022 and 2021, respectively. Engagement marketing costs were $42.1 million and $36.0 million in the three months ended March 31, 2022 and 2021, respectively. Engagement marketing as a percentage of revenue increased to 45% in the three months ended March 31, 2022 from 43% in the three months ended March 31, 2021, respectively. This increase reflects investments in marketing programs that resulted in an increase in our engagement marketing cost per user in the three months ended March 31, 2022 compared to the three months ended March 31, 2021.
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General and Administrative
| Three Months Ended March 31, | % Change | |||||||||||||||||||
| (In thousands, except percentages) | 2022 | 2021 | ||||||||||||||||||
| General and administrative | $ | 92,792 | $ | 27,284 | 240 | % | ||||||||||||||
General and administrative costs increased by $65.5 million, or 240%, to $92.8 million in the three months ended March 31, 2022 from $27.3 million in the three months ended March 31, 2021. The increase was primarily driven by a $65.5 million increase in stock-based compensation expense, which includes $65.1 million related to the cancellation of performance stock units previously granted to the CEO without the concurrent grant or offer of a replacement award. General and administrative expenses accounted for 99% of revenue in the three months ended March 31, 2022 compared to 33% in the three months ended March 31, 2021.
Interest expense, net
| Three Months Ended March 31, | % Change | |||||||||||||||||||
| (In thousands, except percentages) | 2022 | 2021 | ||||||||||||||||||
| Interest expense, net | $ | (8,157) | $ | (24) | NM | |||||||||||||||
Interest expense, net increased by $8.1 million to $8.2 million in the three months ended March 31, 2022 from $24 thousand in the three months ended March 31, 2021. The increase was due to interest expense related to our senior secured notes issued in December 2021.
Change in fair value common stock of warrant liabilities
| Three Months Ended March 31, | % Change | |||||||||||||||||||
| (In thousands, except percentages) | 2021 | 2020 | ||||||||||||||||||
| Change in fair value of common stock warrant liabilities | 4,462 | (2,108) | NM | |||||||||||||||||
The change in fair value of warrant liabilities was due to the decrease in the estimated fair value of the Private Common Stock Warrants.
Other (expense) income, net
| Three Months Ended March 31, | % Change | ||||||||||||||||||||||
| (In thousands, except percentages) | 2022 | 2021 | |||||||||||||||||||||
| Other (expense) income, net | $ | (27) | $ | 50 | NM | ||||||||||||||||||
Other income, net decreased by $77 thousand, to $27 thousand in the three months ended March 31, 2022 from $0.1 million in the three months ended March 31, 2021. The decrease was primarily driven by expense related the realized losses in foreign currency transactions in three months ended March 31, 2021.
(Benefit from) provision for income taxes
| Three Months Ended March 31, | % Change | ||||||||||||||||||||||
| (In thousands, except percentages) | 2022 | 2021 | |||||||||||||||||||||
| (Benefit from) provision for income taxes | $ | (213) | $ | 42 | NM | ||||||||||||||||||
(Benefit from) provision for income taxes increased by $255 thousand to a (benefit from) income taxes of $213 thousand in the three months ended March 31, 2022 from a provision for income taxes of $42 thousand in the three months ended March 31, 2021. The increase was primarily driven by the reversal of net deferred tax liabilities related to the acquisition of Aarki.
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Non-GAAP Financial Measures
In addition to our results determined in accordance with GAAP, we believe the following non-GAAP measure is useful in evaluating our operational performance. We use the following non-GAAP financial information to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe that non-GAAP financial information, when taken collectively with GAAP financial information, may be helpful to investors in assessing our operating performance. These results should be considered in addition to, not as a substitute for, results reported in accordance with GAAP.
Adjusted EBITDA
“Adjusted EBITDA” is defined as net income (loss), excluding interest income (expense); change in fair value of common stock warrant liabilities; other (expense) income, net; (benefit from) provision for income tax; depreciation and amortization; stock-based compensation expense and related payroll tax expense; and certain other non-cash or non-recurring items impacting net income (loss) from time to time, including, but not limited to acquisition related expenses for transaction costs and loss contingency accruals, as they are not indicative of business operations. Adjusted EBITDA is intended as a supplemental measure of our performance that is neither required by, nor presented in accordance with, GAAP. We believe that the use of Adjusted EBITDA provides an additional tool for investors to use in evaluating ongoing operating results and trends and in comparing the Company’s financial measures with those of comparable companies, which may present similar non-GAAP financial measures to investors. However, you should be aware that when evaluating Adjusted EBITDA we may incur future expenses similar to those excluded when calculating this measure. In addition, our presentation of this measure should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. Our computation of Adjusted EBITDA may not be comparable to other similarly titled measures computed by other companies, because all companies may not calculate Adjusted EBITDA in the same fashion.
Because of these limitations, Adjusted EBITDA should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP. We compensate for these limitations by relying primarily on our GAAP results and using Adjusted EBITDA on a supplemental basis. You should review the reconciliation of net loss to Adjusted EBITDA below and not rely on any single financial measure to evaluate our business.
The following table reconciles net loss to Adjusted EBITDA for the periods indicated (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Net loss | $ | (148,113) | $ | (53,592) | |||||||
| Interest expense, net | 8,157 | 24 | |||||||||
Stock-based compensation(3) | 77,925 | 10,945 | |||||||||
| Change in fair value of common stock warrant liabilities | (4,462) | 2,108 | |||||||||
| (Benefit from) provision for income taxes | (213) | 42 | |||||||||
| Depreciation and amortization | 5,539 | 555 | |||||||||
Other expense (income), net | 27 | (50) | |||||||||
One-time nonrecurring expenses (1) (2) | 119 | 8,839 | |||||||||
| Adjusted EBITDA | $ | (61,021) | $ | (31,129) | |||||||
(1)For the three months ended March 31, 2022, amounts represent one-time nonrecurring expenses related to IPO bonuses for certain employees.
(2)For the three months ended March 31, 2021, amounts represent transaction expenses related to the follow-on offering.
(3)For the three months ended March 31, 2022, amount includes stock-based compensation recognized for the cancellation of the Chief Executive Officer’s award of 16,119,540 performance share units granted on September 14, 2021 (the “CEO Performance Stock Units”). Please refer to Note 12, Stock-Based Compensations for more details.
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Liquidity and Capital Resources
Since inception, we have financed our operations primarily from the sales of capital stock. As of March 31, 2022, our principal sources of liquidity were our cash and cash equivalents in the amount of $114.6 million, which are primarily invested in money market funds and marketable securities with maturities of less than three months, and marketable securities in the amount of $539.3 million.
As of March 31, 2022, the Company had 4,535,728 Private Warrants outstanding. During the three months ended March 31, 2022, there was no exercise of any Private Warrants.
In December 2021, the Company offered $300 million in aggregate principal senior secured notes due 2026 in a private offering. The notes were sold in a private placement to qualified institutional buyers. Annual interest started to accrue from December 20, 2021 at a stated rate of 10.25%, and will be payable semiannually on June 15 and December 15 of each year, beginning on June 15, 2022. The notes will mature on December 15, 2026. We intend to use the net proceeds from the offering for general corporate purposes, which may include potential investments in or acquisitions of other companies, products, or technologies that we may identify in the future. The notes contain customary covenants restricting our and certain of our subsidiaries’ ability to incur debt, incur liens, make distributions to holders of our stock, make certain transactions with our affiliates, as well as certain financial covenants specified in the indentures. We were in compliance with all covenants applicable to the notes as of March 31, 2022.
As of the date of this statement, our existing cash resources are sufficient to continue operating activities for at least one year past the issuance date of the condensed consolidated financial statements. Our future cash requirements will depend on many factors, including our rate of revenue growth and the expansion of our sales and marketing activities. We also may invest in or acquire complementary businesses, applications or technologies.
The following table provides a summary of cash flow data (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Net cash used in operating activities | $ | (83,450) | $ | (39,153) | |||||||
| Net cash used in investing activities | $ | (40,744) | $ | (659) | |||||||
| Net cash provided by (used in) financing activities | $ | (2,580) | $ | 389,662 | |||||||
Cash Flows from Operating Activities
Our cash flows from operating activities are significantly affected by the growth of our business primarily related to research and development, sales and marketing, and general and administrative activities. Our operating cash flows are also affected by our working capital needs to support growth in personnel-related expenditures and fluctuations in accounts payable and other current assets and liabilities.
Net cash used in operating activities was $83.5 million for the three months ended March 31, 2022. The most significant component of our cash used during this period was a net loss of $148.1 million , which included non-cash expenses of $77.9 million related to stock-based compensation, including $65.1 million related to the cancellation of performance stock units granted to our CEO, non-cash income of $4.5 million for the change in fair value related to Private Common Stock Warrants, $5.5 million related to depreciation and amortization, and net cash outflows of $15.8 million from changes in operating assets and liabilities. The net cash outflows from changes of operating assets and liabilities were primarily the result of an increase in prepaid expense and other assets of $5.7 million, a decrease in accounts payable of $5.6 million, and a decrease in other liabilities of $4.9 million.
Cash Flows from Investing Activities
Net cash used in investing activities was $40.7 million for the three months ended March 31, 2022. The net cash used in investing activities included $149.5 million for purchases of marketable securities, partially offset by $25.6 million in proceeds from sales of marketable securities and $83.3 million in proceeds from maturities of marketable securities.
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Cash Flows from Financing Activities
Net cash used in financing activities was $2.6 million for three months ended March 31, 2022, which was primarily due to $2.0 million in payments for debt issuance costs.
Contractual Obligations and Commitments
Our material cash requirements include the following contractual and other obligations.
Leases
We have operating lease arrangements for office space, and finance lease agreements for certain network equipment. As of March 31, 2022, we had lease payment obligations of $26.1 million, of which $5.7 million payable within 12 months.
Secured Notes and Term Loan
Refer to “Liquidity and Capital Resources” under Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this Form 10-Q for more information.
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any off-balance sheet financing arrangements or any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities, that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Critical Accounting Policies and Estimates
See critical accounting policies and estimates in our Form 10-K filed March 1, 2022 as there have been no material changes.
Recent Accounting Pronouncements
See Note 2 to our condensed consolidated financial statements for more information about recent accounting pronouncements, the timing of their adoption, and our assessment, to the extent we have made one, of their potential impact on our financial condition and our results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to a variety of market and other risks, including the effects of changes in interest rates, inflation, as well as risks to the availability of funding sources.
Interest Rate Risk
The market risk inherent in our financial instruments and our financial position represents the potential loss arising from adverse changes in interest rates. As of March 31, 2022, we had cash and cash equivalents of $114.6 million, which consisted of money market fund accounts and commercial papers for which the fair market value would be affected by changes in the general level of U.S. interest rates. As of March 31, 2022, we had marketable securities of $539.3 million, which primarily consisted of U.S government, corporate debt securities, asset backed securities, commercial paper, and debt instruments issued by foreign governments, for which the fair market value would be affected by changes in the general level of interest rates. We limit the amount of credit exposure to any one issuer. Our investments carry a degree of interest rate risk. However, due to the low-risk profile of our investments, an immediate 10% change in interest rates would not have a material effect on the fair market value of our cash and cash equivalents and marketable securities.
Foreign Currency Risk
There was no material foreign currency risk for the three months ended March 31, 2022 and 2021.
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ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act), as of March 31, 2022, the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our principal executive officer and principal financial officer have concluded that, as of such date, our disclosure controls and procedures were not effective as a result of previously disclosed material weaknesses in our internal control over financial reporting as described below.
Notwithstanding the material weaknesses, management has concluded that our condensed consolidated financial statements present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented in this Form 10-Q, in conformity with GAAP.
Material Weaknesses
As previously disclosed in our management’s report on internal control over financial reporting within the Form 10-K for the year ended December 31, 2021, we identified material weaknesses in our internal control over financial reporting with respect to the following:
•Information technology general controls (ITGCs) in the areas of access and program change over information technology (IT) systems that support the Company’s financial reporting processes were not designed and operating effectively. Specifically, the Company did not maintain sufficient: user access controls to ensure appropriate segregation of duties and adequately restrict user and privileged access to financial applications, programs and data to appropriate Company personnel; program change management controls to ensure that IT program and data changes affecting financial information technology applications and underlying records are identified, tested, authorized, and implemented appropriately. As a result, the Company’s related IT dependent manual and application controls that rely upon the affected ITGCs, or information coming from IT systems with affected ITGCs were also deemed ineffective.
•Controls designed to properly evaluate certain accounting processes, including where management review is involved, did not operate effectively due to lack of sufficient documentation or evidence retained to demonstrate management’s review.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.
Remediation of Material Weaknesses
During the three months ended March 31, 2022, we continued to design and implement internal control measures to improve our internal control over financial reporting and remediate the material weaknesses. Our efforts included a number of actions:
•ITGC: We are continuing to design and implement improved processes and controls for requesting, authorizing, and reviewing user access to key information systems which impact our financial reporting. This includes the addition of new control activities associated with user access provisioning within our key applications, as well as certain controls which review user access and activity logs. Additionally, we are redesigning our permissions associated with role-based access to our general ledger as well as designing and implementing compensating controls. We also are designing and implementing improved processes and controls over program changes within our key information systems which impact our financial reporting.
•Management Review Controls: We continue to reinforce management review control training for our accounting department to strengthen documentation and retention of evidence to be commensurate with risks associated with accounting processes involving complexity, subjectivity, and estimation uncertainties for specific transactions.
While these actions and planned actions are subject to ongoing management evaluation and will require validation and testing of the design and operating effectiveness of internal controls over a sustained period of financial reporting cycles, we
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believe that these remediation actions, when fully implemented, will remediate the material weaknesses we have identified and strengthen our internal control over financial reporting. We are committed to the continuous improvement of our internal control over financial reporting. As we continue to evaluate and work to improve our internal control over financial reporting, we may take additional measures to address control deficiencies, or we may modify, or in appropriate circumstances not complete, certain of the remediation work described above.
Changes in Internal Control over Financial Reporting
Other than the significant changes noted above associated with the material weaknesses and corresponding remediation procedures as described above, there was no change in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15b-15(d) of the Exchange Act during the first quarter of 2022 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures
Our management, including our principal executive officer and principal financial officer, do not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Due to inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
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PART II
ITEM 1. LEGAL PROCEEDINGS
Refer to note 9, “Contingencies and Commitments,” in this Form 10-Q.
ITEM 1A. RISK FACTORS
There have been no material changes from the risk factors as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
Exhibit No. | Exhibit Description | Form | Exhibit | Filing Date | ||||||||||
| 31.1* | ||||||||||||||
| 31.2* | ||||||||||||||
| 32.1* | ||||||||||||||
| 32.2* | ||||||||||||||
| 101.INS | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |||||||||||||
| 101.SCH** | Inline XBRL Taxonomy Extension Schema Document | |||||||||||||
| 101.CAL** | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |||||||||||||
| 101.DEF** | Inline XBRL Definition Linkbase Document | |||||||||||||
| 101.LAB** | Inline XBRL Taxonomy Extension Label Linkbase Document | |||||||||||||
| 101.PRE** | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |||||||||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). | |||||||||||||
*Filed herewith.
**Submitted electronically with the report.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on the sixth day of May, 2022.
| SKILLZ INC. | ||||||||
| By: | /s/ Andrew Paradise | |||||||
| Name: | Andrew Paradise | |||||||
| Title: | Chief Executive Officer and Chairman | |||||||
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